Federal Reserve personnel: conflict between Trump and the head of the Fed may undermine the role of the dollar

If the US Federal Reserve really loses its independence to one degree or another, then inflation in America may accelerate to 8-10%, and the role of the dollar in the global financial system will be significantly undermined. However, this option is unlikely: the most negative scenario only provides that the current head of the Federal Reserve, Jerome Powell, will resign ahead of schedule, according to economists interviewed by Izvestia. The day before, the conflict between Powell and Trump escalated: the president called the official "Mr. Too Late" for his unwillingness to lower the rate. US markets have already reacted with a fall, and gold has soared above $3,500 per ounce due to concerns about the stability of the dollar system. What is common in the dissatisfaction with central banks in the United States and in Russia — in the Izvestia article.

Trump vs. the Fed: how the conflict developed

American markets collapsed again on April 21 (on the night of April 22, Moscow time): the main stock indexes Nasdaq, Dow Jones and S&P 500 fell by 2.5% in just one day, and over the past month the decline has been within 10%. This is how the markets reacted to a new round of conflict between US President Donald Trump and Fed Chairman Jerome Powell.

On April 21, Trump posted a post on his Truth Social network in which he called Powell "Mr. Too Late" and a "big loser."

However, the attacks on the Federal Reserve began much earlier, when Trump had just become president for the second time. For example, in the midst of the market panic over tariffs on April 4, he said that now was the perfect time to cut rates, increasing pressure on the Fed. Then he publicly announced that he was unhappy with Powell. And White House economic adviser Kevin Hassett said: President Trump and his team continue to explore the possibility of firing the chairman of the Federal Reserve.

Jerome Powell, in turn, has already spoken negatively about US trade policy, saying that it leads to chaos, inflation and economic problems.

Could the Fed lose its independence

The independent status of the Federal Reserve was fixed at its creation in 1913, which means, first of all, that the executive branch and Congress cannot directly interfere in the work of the Federal Reserve, although it is accountable to Congress, explained Olga Belenkaya, head of the Macroeconomic analysis department at Finam. However, as follows from the latest notes in the Western media, the answer to the legal question of whether Trump can dismiss the head of the Fed was not so obvious.

— The fact is that there have been no precedents in history — no American president has fired Fed officials. Given the nature of Trump's previous actions, it is possible that he may go ahead and check how the judicial system will react to the decision to dismiss Powell," suggested Olga Belenkaya.

The probability that the Fed will completely lose its independence is low, according to Yuri Ichkitidze, macroeconomist at Freedom Finance Global. According to him, Trump just needs to prepare an excuse if the tariffs lead to a recession.

"In this case, Powell's criticism and the appeal that he was late with the rate cut will be an important populist argument to blame everything on him," believes Yuri Ichkitidze.

The US president is unlikely to tolerate the fronting head of the Federal Reserve nearby, independent expert Andrei Barkhota believes. In his opinion, the chances of his replacement or strengthening of the Fed by influencers from the Republican Party are equal.

How Trump's conflict with the Federal Reserve will undermine the role of the dollar

The loss of the Fed's independence to one degree or another would be a serious shock to the markets, warned Yuri Ichkitidze. Inflation could jump to 7-10% if the new chairman of the Federal Reserve gathers a team that will do what Trump wants. And in the current conditions, inflation at the level of 5-7% per year will already become a big problem.

The shock to markets due to the loss of the Fed's independence and rising inflation could hit the dollar hard as the world's reserve currency, Yuri Ichkitidze added.

If the freedom of the Fed is undermined, it will have important long-term consequences, Olga Belenkaya from Finam agrees. The independence of the central bank is a necessary condition for the confidence of investors and society in monetary policy, and therefore in investments in this country. Now, when the American economy is overloaded with record government debt, investor confidence is extremely important in order not to lose control over the cost of borrowing, the expert concluded.

— The American dollar index against major world currencies has already lost about 10% since the beginning of the year. The withdrawal from US dollar assets and government bonds is taking place against the backdrop of growing investor demand for defensive assets, which is extremely unusual. Against this background, on April 22, the price of gold has already exceeded $3,500 per ounce," Belenkaya said.

According to her, all this may mean that the course of the new US administration towards isolationism, unilateral economic actions on tariffs and the destruction of established international rules is already leading to a decrease in investor confidence in the policy of the States under Trump. This could accelerate the decline in the dollar's importance as a global currency, at least temporarily, said the head of Finama's macroeconomic analysis department.

Why do we need independent central banks?

The issue of the independence of central banks has been raised in recent years in various countries around the world. For example, for a long time in Turkey, the regulator was controlled by the government of Recep Tayyip Erdogan: the rate was kept low, despite the country's skyrocketing inflation. However, in 2023, a new head came to the Central Bank, the first woman in this post in the country, Hafiza Gaye Ercan: the president allowed her to pursue an independent policy. The rate increased from 8.5% to 45% per annum, and price growth finally began to slow down.

Statements that the Central Bank should be made dependent on the government are also heard in Russia. Deputies submitted such bills to the State Duma in December 2024, when it was expected that the regulator would raise the rate to a record 25% (this did not happen then). Then it became known that the Russian government did not support these initiatives.

— The advantages of the independence of central banks are related to the ability to carry out unpopular but effective measures in the absence of consensus support from the executive branch. The disadvantages are due to the existence of a certain mandate for the long—term irremovability of the Central Bank's leadership," Andrei Barkhota explained.

The principle of independence often results in a procyclical effect of monetary policy: during a recession, the economy slows down more than in the case of central bank inaction.

— In the USA, the Fed plays a much more important role in economic policy than the Central Bank in the Russian Federation. Now the president is exerting pressure on the head of the central bank in the United States, and this is a completely different level of conflict than in the Russian Federation, when pressure was exerted by individual officials, party leaders, and state corporations. And it seems that the peak of criticism of the regulator has already passed," Yuri Ichkitidze from Freedom Finance Global explained the difference.

In Russia, a decrease in the independence of the Federal Reserve will be perceived with concern, since the principles of the Bank of Russia's work were largely ideologically based on the architecture of the Federal Reserve, Andrei Barkhota summed up. However, the principle of "don't change the horse at the ferry" may remain dominant, and the balance of power in the monetary authorities of the Russian Federation will not undergo drastic changes.